Larry’s Note: As you’ll see in today’s essay, AI stocks have been on a tear this year. But it can be dangerous to assume that their runups will continue indefinitely without any pullbacks.
That’s why it’s important to know the right way to trade these big moves… and it’s why I’m preparing my 7-Day AI Blitz event.
There, I’ll explain the best alternative way to play this AI trend. With the market action I see coming, you could double your money – and even make as much as a year’s salary – in the weeklong window I see around the corner.
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Last week, we saw a huge earnings beat by Nvidia (NVDA).
It has been one of the biggest winners from the AI boom this year, with high demand for its graphics processing units (GPUs) and other chipsets.
The microchip manufacturer crushed Q2 forecasts. Revenue came in $2.3 billion higher than expected ($13.5 billion versus $11.2 billion). That represents just over a 100% increase in revenue from a year ago.
Earnings per share (EPS) also beat forecasts by a whopping 30% for the quarter ($2.70 versus $2.08).
Buyers briefly bid NVDA’s stock price above $500. That’s nearly a 260% gain since the start of the year. However, the market always looks to the future. NVDA’s price cooled straight after hitting that high.
So today, I want to check out what’s in store from here.
Nvidia’s Classic Uptrend
The chart of NVDA below shows a stock in a classic uptrend.
NVDA bottomed out in October 2022. It then established a base and slowly began to grind higher.
Nvidia (NVDA)
Source: eSignal
After a small pullback at the end of last year, NVDA’s rally developed at the start of 2023 along with two key bullish signals:
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The Relative Strength Index (RSI) broke up through resistance (green line). It had a brief dip below support in August when NVDA retraced off its July highs. Otherwise, the RSI has remained in its upper half throughout NVDA’s near-year-long rally.
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The 10-day moving average (MA, red line) broke above the 50-day MA (blue line) with both MAs trending higher.
NVDA’s rally really began to take off after its Q1 earnings in late May. A strong earnings beat (18.5% above forecasts) along with a big uptick in forecast revenue saw NVDA gap markedly higher.
That caused the 10-day MA to accelerate strongly above the 50-day MA.
Then, after pulling back into mid-August, NVDA rallied into its Q2 earnings last week.
Despite all the hype around AI, NVDA is fast printing cash. What’s more, NVDA expects to report even bigger growth ahead with forecast revenue expected to reach $16 billion for Q3.
As a result, it opened the next day (after Q2 earnings) on its highs. But NVDA spent the day trending lower. And the following day (last Friday), it traded down as much as 10% below its Thursday high.
Despite NVDA’s positive outlook, investors are wary about buying in case NVDA goes through another pullback.
So, what am I looking for around here?
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Making Higher Highs
While NVDA has been making higher highs, the RSI has been trending down (red line).
Take another look:
Nvidia (NVDA)
Source: eSignal
This diverging pattern often leads to a change of direction. If the RSI continues to fall, it will eventually pull NVDA lower.
Under this scenario, we’d look for the 10-day MA to accelerate below the 50-day MA as further confirmation of any emerging down move.
Yet although the RSI is falling, it will soon retest support (orange arrow).
And what happens around here will be key.
If the RSI bounces off support (green line) and tracks higher, that could set up NVDA for another potential leg higher.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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